Major Assignment FIN510 –Aspects of Corporate Finance Semester 2, 2016 Maximum Marks: 92
The assignment may be completed using excel functions where appropriate. You should make reference to the formula that is applied to your calculations.
(Please show your calculations clearly)
Instructions:
If you use excel spreadsheets, please copy and paste them into MSWord.
Once you have completed the assignment, it needs to be lodged in the Assessments section of Learnline. Your assessments must be lodged using MSWord. PDF, Excel or paper copies will not be accepted.
Required:
1) Make sure your entire assignment can be readily printed on A-4 paper in portrait (preferred) or landscape format with appropriate page breaks. Do not have a portion of a “wide” worksheet expand beyond 1 page.
2) Make sure your name and student number are on every page of your submission.
Ethics:
This is not a group assignment; it is an individual assessment. Your solutions will likely be different from other students. If portions of your assignment are copied or very close to copying, all parties will be penalised for copying. Copying would be considered plagiarism and CDU has strict policies. It is up to you to keep your assessment confidential.
Q. 1 Max Marks: 13
Consider the following bonds:
Bond Coupon Rate (annual payments) Maturity (years)
A 0% 18
B 3% 12
C 6% 18
D 9% 12
Par Value = $1,000
Required:
(a) What is the percentage change in the price of each bond if its yield to maturity falls from 8% to 7%?
(Marks : 8)
(b) Which of the bonds A-D is most sensitive to 1% drop in interest rates from 8% to 7% and why? Provide an intuitive explanation in your own words for your answer.
(Marks: 5)
Q. 2 Max Marks: 11
When you purchased your house, you took out a 30-year annual paymentmortgage with an interest rate of 7.5%. The annual payment on the mortgage is $15,000. You have just made a payment & have now decided to pay the mortgage off by repaying the outstanding balance.
Required:
(a) What is the amount of the loan taken?
(Marks: 4.75)
What is the payoff amount if:
(b) You have lived in the house for 10 years?
(Marks: 1)
(c) You have lived in the house for 19 years?
(Marks: 0.75)
(d) You have lived in the house for 10 years and you decide to pay off the mortgage immediately before the 10th payment is due?
(Marks: 4.5)
Q.3 Max Marks : 24
Using the following data for the 90-day bank accepted bills (BABs) and All Ordinaries Accumulation Index:
BABs
(% p.a.) Returns (BABs) All Ordinaries Accumulation Index Returns (All Ords)
2001 5.9 16,701.8
2002 4.3 -0.2712 15,351.3 -0.0809
2003 4.8 0.1163 17,786.7 0.1586
2004 5.6 0.1667 22,690.1 0.2757
(a) Calculate the expected returns on BABs and the All Ordinaies Accumulation Index over the last three years.
(Marks: 5.0)
(b) Calculate the standard deviation of returns on BABs and the All Ordinaies Accumulation Index over the last three years.
(Marks: 5.0)
(c) Calculate the covariance of returns between BABs and the All Ordinaies Accumulation Index in the last three years.
(Marks: 4.0)
(d) Calculate the correlation coefficient between BABs and the All Ordinaies Accumulation Index in the last three years.
(Marks: 4.0)
(e) Provide an explanation on the covariance of returns and correlation coefficient between BABs and the All
Ordinaies Accumulation Index in the last three years.
(Marks: 2.0)
(f) Calculate the variance of returns on an equally weighted portfolio in the BABs and All Ordinaries Accumulation Index.
(Marks: 4.0)
Q.4 Max Marks : 22.5
(a) The expected return on the market portfolio equals 10%. The current risk-free rate is 5%. What is the expected return on a stock with a beta of 0.5?
(5 marks)
(b) A particular stock sells for $50. The stock’s beta is 1.5, the risk free rate is 6%, and the expected return on the market portfolio is 12%. If you forecast that the stock will be worth $57 next year (assume no dividends), should you buy the stock or not?
(11 marks)
(c) You believe that a particular stock has an expected return of 12%. The stock’s beta is 0.65, the risk-free rate is 5%, and the expected market risk premium is 8%. Based on this, is your view that the stock is overvalued or undervalued?
(6.5 marks)
Q. 5 Max Marks: 21.5
Consider the following projects:
Year 0 1 2 3 4 5
Project A -1,000 1,000
Project B -6,000 1,000 1,000 4,000 1,000 1,000
Project C -
10,000 1,000 2,000 3,000 4,000 5,000
(a) Calculate the NPV of all projects assuming that that then the cost
of capital is 8%.
(Marks: 6)
(b) Calculate the payback period and the discount payback for each
project.
(Marks: 6)
(c) Which of the projects would a firm using the payback method accept if its policy were to accept all projects with a payback period of 3 years or less?
(Marks: 2)
(d) What is the internal rate of return on Project A, B and C?
(Marks: 6)
(e) If you could choose only one of these three projects (they are mutually exclusive), which one would you choose? Why?
(Marks: 1.5)